Getting out from under the sinking ship that is Gap (GPS) is good news for Old Navy.
Gap revealed Thursday afternoon the company would look to split up into two public companies by sometime in 2020. Old Navy will be spun off into its own public company. The remaining businesses named NewCo, which includes Gap, Intermix, Athleta, Banana Republic, will live as its own separate entity.
Old Navy had a strong two-year stretch of sales as it got back to basics in offering affordable, yet stylish clothing. Same-store sales have increased for three straight years. The chain posted a 3% same-store sales increase in 2018 — the best among Gap’s big brands.
Old Navy runs more than 1,100 stores in North America (its largest market) and Asia. The brand hauled in $7.8 billion in sales last year, up from $7.3 billion in 2017.
The business could fetch anywhere from a $10 billion to $17 billion valuation in public markets, estimates veteran retail analyst Simeon Siegel of Nomura Instinet. Gap’s market cap before the news Thursday was a mere $9.6 billion. In effect, Gap has been sitting on untapped value in Old Navy for years. That explains why shares of Gap spiked 24% in pre-market trading and is up 19% in early morning trading Friday.
Old Navy’s valuation naturally would be far lower than some of its key rivals in the value apparel business. TJX Companies and Ross Stores are currently valued at $63 billion and $35 billion, respectively.
Mixed holiday season
But to achieve the top end of Siegel’s valuation range, Old Navy will have to bounce back quickly from a mixed holiday season. The business battled traffic challenges at its stores, which Gap CEO Art Peck blamed on macroeconomic conditions and self-inflicted product miscues.
“In no way shape or form I'll just say it again do I view Old Navy as sick in any way shape or form. Brand health is good,” Peck told Wall Street analysts on a conference call.
It will be difficult to drum up excitement for NewCo, however. Outside of Athleta, the Gap and Banana Republic brands are sleepy relics of the late 1990s with sizable physical store networks. Both brands have struggled for years to drive consistent traffic and keep costs under control.
To that end, Peck said the Gap brand will look to shutter 230 stores over the next two years. He is slated to be CEO of NewCo.
Back of the envelope math by Yahoo Finance puts NewCo’s valuation as a stand-alone entity of $3 billion to $5 billion.
Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi